In 1989, a convergence of economic views was developed around the so-called “Washington consensus” [16]. However, the transition countries that systematized their economies based on Washington Consensus experienced failure [17].

According to Ofer [18], the pattern of economic growth in socialist countries was based on extensive growth, that is, it favoured factor accumulation instead of technological and institutional changes. During this period of time, technology was lagging in transition economies, but with the free flow of information and Western assistance, it was expected that it could be overcome. However, Campos and Coricelli [19] emphasized that: a) the absence of capital markets and restrictions to capital mobility generated a regime of “investment hunger”; b) industrial structure was based on heavy industry not on light industry; and services were considered as “unproductive” items of the growth; c) there was no unemployment under socialism, but constant excess demand for labour existed. Moreover, the absence of innovations in conjunction with the lack of technological progress resulted in no entry of new firms and no competition [20].

For these reasons by the end of the nineties, the Washington Consensus was extended to the so-called “second generation policies” and directed measures towards good governance-stretching from reforms of bureaucracy to labour market reforms, anti-corruption measures, social safety nets and poverty reduction programmes [21].

Considerably, the transition process itself was a part of the “creative destruction” building up a market system and simultaneously destroying the legacies of at least a half- century of planned economy [22].

Stabilization effort. The main approach of the Macedonian economy during the transition period, based on the Washington Consensus criteria, was to achieve stabilization in the market, to stabilize the monetary policy, to regulate the public finances and to reform the civil society. For these reasons, in 1995, the government and National Bank of Republic of Macedonia (NBRM) established a stabilization program in order to decrease inflation, reduce public debt and stabilize the volatile performance of the economy. According to Fiti [23] within this context, two complex groups of issues were of particular importance for overcoming the economic stagnation and alleviating unemployment in the Macedonian economy: “the restructuring of the real sector” and “the increase in physical and human capital investment”, whereas, Petreski [24] emphasizes that analysis of actual and potential sources of growth in Macedonia have to be clearly prescribed and analysed.

In the overall transition period, economic growth was sluggish and volatile. Hence, recorded growth in the period of 2003-2009 placed Macedonia among the slowest growing economies in Southeast Europe [22]. The persistence of low rates of the real growth accompanied by significant fluctuations raises concerns about the real capacity of the overall economy to generate growth.

However, the civil conflict in 2001 disrupted a brief period of positive economic momentum. Although direct damage from the conflict was limited, investment activity markedly dropped; defence-related expenditures pushed the budget and increased current account deficits. Thus, effects of the conflict were clearly felt in 2002 as investment and export growth remained sluggish while budget and current account deficits remained high[25]. Further, political and social restructuring policies were damaged, whereas institutional and structural improvement lagged behind and unemployment significantly increased.

The source of GDP growth. The large contribution from TFP is common during the initial period of post-communist transition, where TFP growth is a result of elimination of inefficiencies of the former economic regime. Recent empirical analyses of IMF [26] emphasize that capital formation and employment have become more significant determinants of the growth rate in Macedonia. IMF analysis explains that growth in Macedonia is mainly driven by total factor productivity (TFP). According these data, TFP accounted for almost two-thirds of output growth for the periods 1996-2000 and 2001-2008, while the contributions from labour and capital have been low, explaining around one-third of the growth rate [27].

The growth of the TFP during the transition period can be mainly attributed to the reallocation of labour and capital resources during the establishment of a market economy, a source that is already fully exploited [28] (Figure 1).

Figure 1.

Contribution and share of the production factors and TFP to growth in Macedonia (1998-2008)

Source: The World Bank staff calculations

However, in the standard growth accounting framework, decomposing GDP growth into growth of factor inputs and residuals, reveals that in Macedonia, the total factor productivity had the largest impact on overall growth with 42% over the period 1998-2008 (see Table 1).

Consequently, Macedonian economy would not grow rapidly without large initial infusions of capital and labour. In order to increase the private and public saving rates, to generate business cycles that positively affect economic growth; and dynamic mechanism that increases social welfare and social capital accumulation, Macedonia needs some other “engine of growth”—in addition to factor accumulation.

This section details the findings from the estimation of the equation. The approach is estimated using Ordinary Least Squares (OLS) for the growth equation. First, R² of the model is interpreted. It is expected that as the value of adjusted R² increases the model is better explained. However, it would be a mistake if analyses are interpreted based on adjusted R². For this reason at first "Significance¹" value is interpreted in order to see the goodness of fit of the model. If the value in “Sig.” is less than 0.05, then it is assumed that the estimate in column “B” can be asserted as true with a 95% level of confidence. If this value is more than 0.1 then the coefficient estimate is not reliable because it has "too" much dispersion/variance.

On the basis of the obtained economic growth, correlation analysis is used for investigating the relationship between economic growth and its determinants. Next, independent-samples T-test is used for finding of the mean differences within economic growth factors.

Table 2 presents regression results – based on separate regression analysis – of each variable explained in the research. Regarding “Sig.” value of predictor variables investments, health expenditure, and institutional improvement appears to be statistically significant. However, the effect of R&D, gross domestic savings and population mostly remains weak and statistically insignificant for the Macedonian economy.

Estimation results show that due to the small sample size of the data, separate regression of each variable is weak in terms of explaining the impact of independent variables to GDP growth.

For these reasons, Table 3 presents regression results with predicted variables of growth calculating their impact on GDP. In this approach, the goodness of fit of the regression model is significant (ANOVA Sig. is 0.007)² and it implies that we can accept the equation. Whereas, if “Sig.” less than 0.05 then it is assumed that the estimate in standardized coefficients column “B” could be asserted as true with a 95% level of confidence. Regression analysis is significant with R²=0.988 and adjusted R²=0.961.

The results of the coefficient of the investment variable are positive and statistically significant and this shows that it has positive impact on GDP growth in Macedonia. The R&D standardized beta coefficient is negative (-) 0.239 and it is statistically insignificant. Thus, it is observed that data of R&D for Macedonia is not continuous and remains poor. Consequently, it could be concluded that regarding long-term intensive growth, the impact of R&D on economic growth is not observable yet.

The gross domestic savings coefficient is positive (0.776) and statistically significant. However, the domestic saving rate of the economy remains poor; although it is seen as an indicator of generating investments.

As regards health expenditure, the explanatory coefficient is positive 0.234 but statistically insignificant (with sig.=0.137) in the case of Macedonia it could not be explained due to poor data availability. However it could be concluded that, as a social determinant, it is not improved.

Furthermore, the institutional coefficient remains weak with (-) 0.562 and statistically insignificant. It could be concluded that the transition itself has not improved its legacies. It is observed that negative population growth is the result of slowed economic performance. Thus, the population growth coefficient is negative and statistically significant.

Consequently, from the viewpoint of growth, due to poor and non-sustainable data availability, it could be concluded that the transition itself had a negative impact on Macedonia’s market system. Macedonia needs fast and dynamic improvement at all levels in order to promote economic growth and stability.